Do you believe in Big Foot?  How about little green men, or Santa Claus?  No?  Well, let me ask you another question – do you believe in the much-ballyhooed REO Tsunami?


In case you’re somehow not familiar with it, the REO Tsunami is the supposed tidal wave of foreclosure real estate.  As legend has it, “the banks” are holding on to millions of delinquent loans which they will, probably “next quarter” (it’s always just a quarter away) release into the market and create a flood or a tsunami of bank-owned REO listings.

It seems the most impassioned believers in the REO Tsunami are real estate agents.  Many of these agents have heard from their “contacts” in the REO industry about the coming of this tsunami and a lot of them say they’re staffing up and preparing themselves for the onslaught.

I stopped believing in Santa Clause not long after I was out of diapers – and I stopped believing in the REO Tsunami a long time ago, too.  Yes, it’s true, there are millions of home loans in some stage of default.  And, it’s true that home prices are still dropping and the risk of strategic default by borrowers should be rising right along with it.  Buyer demand remains weak, employment remains weak; all indications point to no quick end to the backlog of delinquent loans.

I just finished reading the story in HousingWire called The Department. The articles talks about Bank of America’s Legacy Asset Servicing department which has been set up to handle the banking giant’s non-performig loans.  The article mentions that The Department is responsible for a portfolio of approximately 6.7 million loans totaling about $1 trillion all together.  It seems that BofA has a goal to clean their books of these loans within three years.  Although the article says it will describe how BofA plans to do it, they don’t go into any detail about this – just that they plan to do short sales, loan modifications including some principal write-downs, and, of course, they plan to foreclose on whatever’s left and dispose of it through traditional REO channels.

Word on the street is that BofA has in fact “opened the doors” to its REO department, and has been accepting applications from agents who want to list BofA’s REO properties.  I have it on good authority that in the San Francisco Bay Area alone, BofA is looking to expand its network of brokers by 300 – which would seem to indicate that they do plan to move a lot more REO here locally in the near future.

But this is just one mortgage lender.  I haven’t heard that any other lenders are gearing up to doing anything comparable.  I have heard (from RealtyTrac) that 2011 will be the “peak year” for REO nationwide, and that some lenders will be releasing more inventory than they did in 2010.  So far, though, I can’t say as I’ve seen any hard evidence that this is actually going to happen. But if it does happen, I don’t think the levels of REO are going to be so much higher that anyone could properly call it a tsunami, or even a flood.  Maybe something of a splash?

I think we’re going to be looking at more of the same for some years to come.  The question is, how much more?  I don’t think much more, but I don’t think much less for the next 2-3 years.  Beyond that, say in the 3-5 year time frame, I still expect we’ll see elevated levels of REO nationwide and locally here in the San Francisco Bay / Silicon Valley area.  In terms of my local market here, when I say “elevated” I mean quite a bit elevated, as historically there has not really been that much REO to go around here thanks to our strong local economy – but nationwide I think it looks like things will be settling down to a more typical level of foreclosure activity a few years down the road.

Of course, anything can happen.  It’s impossible to know with any degree of certainty what the market is going to be like 2-5 years from now.  But I personally am not making any plans based on a tidal wave of REO in the next 1-2 years, but rather that we’ll keep plodding through the bad loans on the balance sheets, bit by bit, until, a few more years down the line, the market will have shifted back to something closer to the “old normal.”

But if I’m wrong, and all of a sudden there is a huge tsunami of REO assets – we here with the Silicon REO Group will be ready for it, thanks to our flexible business model and scalable systems.  Whatever’s coming, we welcome it.  To quote one of the keynote speakers for the 2011 Five Star Conference:  Bring it on.